James Buchanan’s demand theory gobbledygook

30 October, 2014 at 20:20 | Posted in Economics | 2 Comments

Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economic theory — have increased relative to Pennsylvania. However, when economists Alan Krueger and David Card gathered information on fast food restaurants in the two states, it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to neoclassical demand theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …

buchananThe inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.

James M. Buchanan in Wall Street Journal (April 25, 1996)

Go Canada Go!

29 October, 2014 at 22:22 | Posted in Varia | Leave a comment


Macroeconomic aspirations

29 October, 2014 at 17:00 | Posted in Economics | 4 Comments

Oxford macroeconomist Simon Wren-Lewis has a post up on his blog on the use of labels in macroeconomics:

EPAreadlabelLabels are fun, and get attention. They can be a useful shorthand to capture an idea, or related set of ideas … Here are a couple of bold assertions, which I think I believe, and which I will try to justify. First, in academic research terms there is only one meaningful division, between mainstream and heterodox … Second, in macroeconomic policy terms I think there is only one meaningful significant division, between mainstream and anti-Keynesians …

So what do I mean by a meaningful division in academic research terms? I mean speaking a different language. Thanks to the microfoundations revolution in macro, mainstream macroeconomists speak the same language. I can go to a seminar that involves an RBC model with flexible prices and no involuntary unemployment and still contribute and possibly learn something.

Wren-Lewis seems to be überjoyed by the fact that using the same language as real business cycles macroeconomists he can “possibly learn something” from them.

Hmm …

Wonder what …

I’m not sure Wren-Lewis uses the same “language” as James Tobin, but he’s definitely worth listening to:

They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

Arjo Klamer, The New Classical Mcroeconomics: Conversations with the New Classical Economists and their  Opponents,Wheatsheaf Books, 1984

And contrary to Wren-Lewis I don’t think the fact that “thanks to the microfoundations revolution in macro, mainstream macroeconomists speak the same language,” takes us very far. Far better than having a common “language” is to have a well-founded, realist and relevant theory:

Microfoundations for macroeconomics are fine in principle—not indispensable, but useful. The problem is that what passes for microfoundations in the universe of orthodox macro is crap …

realityIt’s nothing more than robotic imitation of teaching exercises to improve math skills, without any consideration for such mundane matters as empirical verisimilitude. I will mention three crushing faults, each sufficient by itself to blow a wide hole in a supposedly useful model …

It is rife with anomalies (see “behavioral economics”), and, most important, it is oblivious to the last several decades of work in psychology, evolutionary biology, neuropsychology, organization theory—all the disciplines where people study behavior in a scientific way …

There are no interaction effects to generate multiple equilibria in the microfoundations macro theorists use. Every individual, firm and product is an isolated atom, floating uninterrupted through space until it bumps into another such atom in the marketplace. Social psychology, ecology, nonconvex production and consumption spaces?  Forget about it …

Microfoundations means general equilibrium theory, but the flavor it uses is from the mid-1950s. The Sonnenschein-Debreu-Mantel demonstration (update to the 1970s)  that initial conditions and out-of-equilibrium trades alter the equilibrium itself has turned GET upside down.

Notice that I haven’t mentioned the standard heterodox criticisms of representative agents and ergodicity. You can add those if you want …

Like I said, their microfoundations are crap.

Peter Dorman

Macroeconomists have to have bigger aspirations than speaking the same “language.” Rigorous models lacking relevance is not to be taken seriously. Truly great macroeconomists aspire to explain and understand the fundamentals of modern economies. As did e. g. John Maynard Keynes and Michal Kalecki.

The insuperable problem with ‘objective’ Bayesianism

28 October, 2014 at 08:52 | Posted in Theory of Science & Methodology | 4 Comments

9780702249631 A major, and notorious, problem with this approach, at least in the domain of science, concerns how to ascribe objective prior probabilities to hypotheses. What seems to be necessary is that we list all the possible hypotheses in some domain and distribute probabilities among them, perhaps ascribing the same probability to each employing the principal of indifference. But where is such a list to come from? It might well be thought that the number of possible hypotheses in any domain is infinite, which would yield zero for the probability of each and the Bayesian game cannot get started. All theories have zero
probability and Popper wins the day. How is some finite list of hypotheses enabling some objective distribution of nonzero prior probabilities to be arrived at? My own view is that this problem is insuperable, and I also get the impression from the current literature that most Bayesians are themselves
coming around to this point of view.

Kalecki on ‘sound finance’

28 October, 2014 at 08:02 | Posted in Economics | 2 Comments

To many conservative and libertarian politicians and economists there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these Keynesophobics to fight it, are the confidence argument and the doctrine of ‘sound finance.’

Is this witless crusade againt economic reason new? Not at all. In 1943 Michal Kalecki wrote in his classic essay Political aspects of full employment:

kale It should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives …

Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article …

We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

Keynes on data mining

27 October, 2014 at 21:52 | Posted in Statistics & Econometrics | Leave a comment

istheseptuagintaIt will be remembered that the seventy translators of the Septuagint were shut up in seventy separate rooms with the Hebrew text and brought out with them, when they emerged, seventy identical translations. Would the same miracle be vouchsafed if seventy multiple correlators were shut up with the same statistical material? And anyhow, I suppose, if each had a different economist perched on his a priori, that would make a difference to the outcome.

J M Keynes

The non-existence of econometric objectivity

27 October, 2014 at 14:57 | Posted in Statistics & Econometrics | Leave a comment


It is clearly the case that experienced modellers could easily come up with significantly different models based on the same set of data thus undermining claims to researcher-independent objectivity. This has been demonstrated empirically by Magnus and Morgan (1999) who conducted an experiment in which an apprentice had to try to replicate the analysis of a dataset that might have been carried out by three different experts (Leamer, Sims, and Hendry) following their published guidance. In all cases the results were different from each other, and different from that which would have been produced by the expert, thus demonstrating the importance of tacit knowledge in statistical analysis.

Magnus and Morgan conducted a further experiment which involved eight expert teams, from different universities, analysing the same sets of data each using their own particular methodology. The data concerned the demand for food in the US and in the Netherlands and was based on a classic study by Tobin (1950) augmented with more recent data. The teams were asked to estimate the income elasticity of food demand and to forecast per capita food consumption. In terms of elasticities, the lowest estimates were around 0.38 whilst the highest were around 0.74 – clearly vastly different especially when remembering that these were based on the same sets of data. The forecasts were perhaps even more extreme – from a base of around 4000 in 1989 the lowest forecast for the year 2000 was 4130 while the highest was nearly 18000!

John Mingers

Dawit Isaak — Sweden’s only prisoner of conscience

27 October, 2014 at 07:53 | Posted in Economics | Leave a comment

Swedish-Eritrean journalist and writer Dawit Isaak has been held in Eritrean prison for 13 years without trial. He is the only Swedish citizen held as a prisoner of conscience.

Today is his 50th birthday. Let us hope it is the last spent in prison.

Free Dawit Isaak!

Keynes’s fundamental insight

26 October, 2014 at 22:48 | Posted in Economics | 3 Comments

The difficulty lies, not in the new ideas, but in the escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

John Maynard Keynes

Mark Blaug (1927-2011) did more than any other single person to establish the philosophy and methodology of economics a respected subfield within economics. His path-breaking The methodology of economics (1980) is still a landmark — and the first textbook on economic methodology yours truly had to read as student.

At last — a worthy Nobel Prize winner

26 October, 2014 at 09:41 | Posted in Varia | Leave a comment


In her breathtakingly simple, moving and beautiful speech at the United Nations last year, Malala Yousafzai wrote herself into history. A more fortright plaidoyer for what really can change the world – empowering knowledge and education for all – has seldom been heard. Malala is a living proof that not even the most heinous totalitarianism can defeat young people’s call for for education and justice.

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